Can Macron Pull it Off?

Emmanuel Macron’s victory over Marine Le Pen was much-needed good news for anyone who favors open, liberal democratic societies over their nativist, xenophobic counterparts. But the battle against right-wing populism cannot be won without deeper European integration, and Germany may not be ready to go along.

CAMBRIDGE – Emmanuel Macron’s victory over Marine Le Pen was much-needed good news for anyone who favors open, liberal democratic societies over their nativist, xenophobic counterparts. But the battle against right-wing populism is far from won.

Le Pen received more than a third of the second-round vote, even though only one party other than her own National Front – Nicolas Dupont-Aignan’s small Debout la France – gave her any backing. And turnout was apparently sharply down from previous presidential elections, indicating a large number of disaffected voters. If Macron fails during the next five years, Le Pen will be back with a vengeance, and nativist populists will gain strength in Europe and elsewhere.

As a candidate, Macron was helped in this age of anti-establishment politics by the fact that he stood outside traditional political parties. As president, however, that same fact is a singular disadvantage. His political movement, En Marche !, is only a year old. He will have to build from scratch a legislative majority following the National Assembly elections next month.

To suggest that the Grande Nation can only be saved if alimented by Germany is a bit hard to swallow. The more courageous approach would be for France AND Germany to ask how they together could aliment the Southern Periphery. Let's not forget that France has a huge economy, a huge industrial sector, corporate giants and world-wide band names, etc. etc.

The threat is not Le Pen. The threat is the suggestion that there can be living standards without regard to productivity. It is the latter threat which causes the former.

At some stage it seems, reading the comments on this commentary, that there is a widespread agreement that there will be a major North/South split sooner or later.

Macron's success or otherwise will perhaps determine which side of that split the French will take. Neither option will suit the psyche of a proud nation forced to choose between being second fiddle to Germany or demoted to the economic second division.

If Macron wants to to be succesful it must look at other countries ( Italy , Spain ...) to fight the " divide et impera" politic of Germany, starting first with a great pnblic investiment plan ( not the ridicolous one of Junker) to combact the unenployment.

Yes, the election of the energetic, open, liberal Macron over the xenophobic and the statist Mme Le Pen is certainly a motive of pride for the French, they did not fall into the populist trap followed by the Americans and the British. Yes “if Macron fails during the next five years, Le Pen will be back with a vengeance.”

Yes Macron has today no operational political party and it is unlikely that he will get a majority in the National Assembly to confirm the Prime Minister he will choose and to use executive orders to implement its program. T. Piketty’s economic policy represents traditional French socialist-yesterday ideas (always more state intervention, a universal salary for all to fight against unemployment, and the traditional tax and spend policy).

Yes employment should be the top objective of a lucid President (it was not the case of the previous ones, in spite of the official lines).

Now I fully disagree with your solution, which does not take into account France’s characteristic (the French “binding constraint” IMF/F&D/Hausmann, Rodrik, & Velasco, 2006, this the so important concept you coined and you don’t apply it to France).

The public expenditure ratio is the French binding constraint. It was 46% of GDP in 1980 and 56.5% in 2016 (+11 points in 30 years), it is always rising; the highest level in the world (against 44% in Germany, 35% in the US in 2016). This has considerable negative effects on the economy (this expenditure ratio implies a strong tax burden thus low appropriability, low growth, high unemployment, private sector’s crowding out by the public sector, a "service public" mentality instead of an entrepreneur mentality (which used to be a French word). The result of it is: a declining potential GDP (which is permanent), economic decline and high unemployment.

There is virtually no evidence that raising more public expenditure will increase employment. If E. Macron wants a five-year €50 bn stimulus plan, he will have to reduce recurrent (permanent) public expenditure by…€80 bn to reduce permanently the expenditure ratio to at least to 52% of GDP in 2022. The solution is the opposite of a Keynesian one, it consists to reduce the French’s expenditure ratio at the level of 50% (which will be more or less at the average EU level).

The idea to converge toward a Eurozone fiscal union, with a common treasury and a single finance minister, a Eurozone budget is wishful thinking. Germany and other Nordic countries will never accept it and this is a way of escaping the issue. Germany will never accept “permanent fiscal transfers” from the surplus countries (Germany, Netherlands, Greece (yes Greece has a fiscal surplus in 2016), Luxembourg, Estonia, Ireland, Latvia, Lithuania, and Malta) to France. France must reduce its fiscal deficit, not through tax increase (what have done Sarkozy (2007-12); incidentally, Madame Lagarde was her Minister of Finance, and F. Hollande (2012-17), incidentally, Mr. Macron was his Minister of economy) but through expenditure reduction. The argument saying that this Eurozone budget will be under the control of Euro Parliament (there is no Eurozone parliament) thus will be a factor of accountability is not very convincing, as far as I know, the respected US Congress and French Parliament are not the best guarantor of fiscal rectitude… The argument saying that “fiscal unification” would make possible for France to increase infrastructure spending and boost job creation without busting fiscal ceilings is a traditional leftist argument; it consists to transfer my deficit to other countries who are so stupid that they will not notice it…or this deficit will create so much economic growth that it will disappear, if it were true, France will be the fastest-growing country in the world (the French budget was in the red for 40 years).

This is not by asking surplus countries to finance France’s profligacy that there will be permanent job creation. In this case, I don’t understand, why you don’t use the same argument for a country much more in need than France, Greece, and why not Italy, Spain…I personally understand the reluctance of Germany to be the aid donors of profligate countries (needless to say that the transfer will always be from Germany to Southern countries). This simplistic Keynesian policy is nothing else than a mask to postpone the necessary expenditure adjustment needed for France. The US automatic transfers from rich states to poor states seem to exist more in academic books than in the reality. The French tax system is too high and with so many distortions that it could not be accepted by other Euro countries and this is what is at stake behind the ideology of “fiscal union.” It is, in my view, wrong to say that a monetary union needs a fiscal union, it needs fiscal discipline because the member countries have no currency.

So for a country as France, the pertinent concept to use is not the dear Keynesian fiscal deficit, but the French’s “binding constraint” public expenditure to GDP ratio, which is increasing in a sclerotic country as France. French structural constraints will not disappear with a higher fiscal deficit financed by other countries. The macro strategy for France consists in my view 1) to reduce pubic expenditure (there is extensive room to curtail public recurrent expenditure in France (too many civil servants, pension too generous, not enough working hours, too much and not targeted to the poor welfare expenditure). 2) To reduce at the same time the tax burden on profit and labor which is the highest in the EC. 3) To reduce all limitations on the private sector and employment, these together and if done quickly and strongly could have an immediate effect on confidence and job creation. The lack of fiscal space in France obliges it to perform a supply-side policy not a simplistic Keynesian policy.

Anybody who thinks that Fiscal Integration cannot be realistic in Europe where there are large economic disparities between countries, has obviously not lived in the USA. Anybody who thinks that Wyoming ( or New Mexico) is closer to California than Greece is to Germany, has not taken a closer look.

The issue hinges on a lot more than economics. It is about strategic choices having to do with security, stability and the advantage of pooling resources in a way to benefit member states more than if they were alone. Like the AmEx commercial says " membership has its privileges" ... otherwise why be or remain a member ??

Fiscal Integration is an absolute necessity if the EU is to survive in its current form. Macron is right on.

One of the most important advantages to Fiscal Integration is to accomplish military solidarity in an era where Germany is vulnerable to Russia and France has Europe's strongest capability.
There is a lot more to fiscal integration than transfer payments, which by the way, are not giveaways but loans to facilitate economic growth commensurate with potential.

Macron is immensely important to EU's future: it will either became more integrated to manifest its potential, or it will disintegrate to become just a free-trade arrangement with every country left to its own devices. If history serves as a guide, we know how successful that has been....

The germans are too smart to give SPD more power. Juckers lap-dog Schultz is not as popular as SPD thinks (only the ones with a very short memory). Frau Merkel will not agree to a transfer union, she fears inflation and the verdict of the german voters. The EURO is doomed and it will be a blessing to get rid of it. Better now than later! It will cause turmoil in the market, for a time. The value of a currency must be related to "internal value", not just based on german economics. I am afraid we are not out of the woods. if Macron fails the bill to pay will be enormous.

Of course there is a need for something like a fiscal union, but with benefits come responsibilities. France needs reforms to align it to the core. Also, boosting demand in the periphery increases benefits for businesses in the core. A deal will need to be struck for that and it will not be pain free for the French. I wonder if people are able to buy that before a crisis ensures that makes the present problems look like sweet candy.

I do not understand how so many people can look at countries with youth unemployment rates of perhaps 25%, and blame that on laziness or early retirement. The Eurozone is suffering from an over-all lack of demand. That is the central problem.

I do agree that the single currency was a mistake, and suspect that Europe would be better off in the long run abandoning it and going back to local currencies. But I also understand the short-term chaos that would cause.

Paul. There is much demand, both in the EU as well in the world. It is more a question of competitiveness. You have to make products that are of a quality and a price that a customer want and can afford to buy it. This is on an individual as well a national level. Many factors determine the success of countries: way of life, politics, laws, vested interest, corruption, industrial history. In Global Competitve Report of the World Forum, Germany is ranked at 5, France 21,

I do not mind if people in France, or other Southern countries, retire at age 62 and drink a glas of wine.
Perhaps it is the best way to live life.
But I do mind that in the Netherlands we have to retire past the age of 65, and beyond, to have to pay for it.
In the mean time the low interest rates deplete our pensionfunds, but the interest rates cannot be raised because the Governements in the South cannot bear it.
It is time we go back to the European Trade Community, without an Euro.

Henk the idea of low interest rates is to subtract money from people who have money. It is a form of wealth transfer. Its popular because it is difficult to take money from people who dont have any money : )

"Macron’s more ambitious idea is to take a big leap toward a eurozone fiscal union..... This would enable, in his view, permanent fiscal transfers from the stronger countries to countries that are disadvantaged by the eurozone’s common monetary policy."

Is this seriously Macron's plan for French economic salvation?

He has as much of a chance as had Varoufakis in trying to convince Schauble et al to extinguish the Greek debt.

Many believe Germany is the only obstacle for transfer unuion, but I disagree. Why should a dutch or finish taxpayer contribute to greek/italian pensioner, unemployed or corrupt politician? Maybe Germany can be blackmailed using war guilt, but how do you convince dutch or fins. Netherlands was a war victim, they do not owe anything to anyone. While Finland was a formal German ally, they didnt have any military involment in western european fighting, only some small voluntary units on Eastern Front. If Germans dont block transfer union, dutch and fins surely will. And rightly so, as transfer union woud be like pouring water in bottomless pit. It wouldnt lead to South rising up to Northern levels, but North falling to Southern. All equal finaly, everyone poor. Is that the goal?

And it would lead to yet another war. North would be increasingly exasperated by south squandering their money, while south would keep asking for more seeing no convergence, as we see no convergence of italian south to italian north despite decades of subsidies. In the end, rising tensions and hostility would lead to breakup of eurozone and another paneuropean war. This time North vs South.

Better break it up now, while the level of hostility and tensions is still relatively low.

I dont blame Greeks for anything. Greeks are ... well, greeks. The original sin was to lump together countries with fundamentaly different economies in one currency union, and this comes down to arrogance of French and Germans

Yes, I agree with your analysis of situation. The productivity gap between North and South is so huge, ans again im not blaming anyone for this, just pointing out to mere facts, that the only "solution" to hold this house of cards together is massive money printing and debt accumulation which is, as you said, unsustainable and will lead to inevitable collapse.

Yes, the war is economic, but economic wars usually lead to physical war, just think of japanese american tensions before WWII. And of course im not talking about a war right now, but if this artificial, frankenstein currency union lasts for few more decades, tensions and hostility will only rise and a paneuropeann war is a highly possible scenario, im afraid.

From Project Syn earlier 'The euro is currently priced at $1.07, whereas OECD purchasing power parity stands at $1.29. This implies a 17% undervaluation of the euro. Moreover, Germany is 19% too cheap within the eurozone if one uses as a baseline a calculation by Goldman Sachs from 2013 and subtracts the appreciation in real terms since that time. On the whole, this implies that Germany’s currency is undervalued by about a third.' Hans-Werner Sinn
https://www.project-syndicate.org/commentary/trump-germany-currency-manipulation-charge-by-hans-werner-sinn-2017-03

Peter your not seriously suggesting that it is Greeks fault the euro debt machine delivers this advantage to Germany are you. This is simply because the EZ is a common currency area with no transfer mechanism. Unless the EZ is restructured it can only collapse. It is pretty obvious that the Bundestag will quite legally block EZ reform based on German voter opinion. A few posts down I gave the article link which discusses Merkels modus operandi which is to wait for the majority concensus to develope and then lead from behind. At present there is zero chance of meaningful reform of the EZ leaving only currency debasement via printing and ultimately implosion due to debt. As the debt mounts in the system it will become to large for the system beneficiaries to address even if there is the political will. The only solution for unemployed youth in the South is migration North which helps the North by some balancing of the aging demographic but depletes the South. No amout of money printing will address the imbalance. It is shameful that this is not more openly discussed on these pages by columnists but is probably because they are immediately attacked as fifth columnists. Germany has a get out clause because it is accumulating wealth it would not without the euro. Nobody else has. The war is economic not physical

So on one side we have a not even 40 year old "Hope and Change" kind of guy and on the other hand, a 62 year old career politician with an unbelievable knock for reading voters and leading from behind. Yea, the odds of EU reform make that Leicester title win bet look like a no-brainer.

I don't think Macron is seriously interested in any kind of stimulus plan, however modest its size. It will probably be like Trump's infrastructure program.

I am sure Germany will never agree to a transfer union, if it does agree to have some kind of transfer it will not be nearly enough to fix the eurozone imbalances. A Eurozone finance minister would effectively mean having Dr Schäuble piloting the eurozone's budget. Great prospect. Germany is hostile to any kind of public investment, even in its own country.

So there is really nothing to expect and if Macron thinks he will get something from the Germans by shoving his structural reforms down the Frenchs' throat he's really fooling himself.

My reading of history is that neoliberal reforms do work... Over a period of many, many decades. However, they generally only work if they are endogenous. In other words, freely chosen by the people of a given nation. Externally imposed reforms have a an even poorer track record.

In the short-term, employment can only be increased by raising demand. Massive deficits work (for a while) as a Keynesian. Check out employment in the U.S. during WWII. The other approach is massive devaluation of the currency. Many countries have enjoyed substantial recoveries after a large devaluation. France is barred from either approach. Macron's prospects for success are poor.

When Sterling became an Oil currency due to N Sea Oil it rose in value making large sectors uncompetitive internationally. The sectors that were affected for example manufacturing never recovered and the City of London was developed to fill the economic hole. The underlying message seems to be that the best solution is developing a whole new activity but in the case of France it is difficult to see any obvious opportunity for a large new sector (or for the UK as it currently is)

Italy has already tried the approach advocated by Macron and Rodrik. The Italian North provides endless subsidies for the Mezzogiorno. Has an endless flood of Northern Italian money fixed the South? Of course, not. Germany will resist a transfer union and rightfully so. History shows that transfer unions don't work.

Exactly. Italy itself, which is craving for subsidies, is the best example that subsidies dont work. Italian south is as poor and uncompetitive as it always was despite decades of money transfers. And on european level it would work even worse, only increasing tesnions and hostility among countries.

Scrap the unworkable, utopian eurozone, let´s try, for a change, some responsibility. Everyone paying his own debts.

To expect others to converge on the German model is hopeful to say the least. To expect Germany to move away from the German model, which is implicit in closer union is hopeful. As far as union goes coitus interuptus can be expected to continue.

Breaking up eurozone wont lead to war if it´s done now, or within few years. But waiting few decades, as tensions and hostily builds up, could very possibly lead to a big european war. Eurozone will never become a proper monetary union, because the cultural differencies are simply too big. The very belief that so many european countries, with so fundamentaly different cultures can have a common currency is a pure utopia and ignorance.

Of course, Europe is a master in creating utopias throughout its history, unfortunately, it usually ends in a big distaster costing lives of millions of people. So i say, end of utopias, time to enter the real world.

To Peter,
When I said small price, I meant money, be it billions or even trillion. When I said heavy price, I meant same this that you said: an actual war / rebellion against Germany which will cost billions plus people's lives. I would pay the small price.

Italy has to ask for the radio to play 'Roll Over Beethoven'. Massive debt needs to be rolled over. Not advisable to play 'Breaking up is so very Hard to Do' until after 'Roll over Beethoven'.

Take Italy out of the euro and you take away German credit rating's reflected glory and you will see GR crisis type interest rate escalation and the radio will be playing 'Sea of Heartbreak'.

The youth fleeing the South due to unemployment will simply accelerate the ageing demographic imbalance and show up in a decade. (Tax revenue drop alongside debt growth).

What is going on is complete and utter madness but reaction will not be taken until it is much worse it would seem. It probably is too late already because the euro machine has been building up the continental drift stresses for a decade. At some point Germany will say we have done everything possible, and within their system they will have because at the end of the day Bundestag does what the German voters want.

Early voluntary quitting by Southerners is likely to follow the GR reflex, gagging then swallowing hard. Anything is possible but most things are improbable including Macron being Joan of Arc.

I envy anybody thinking there will be a happy outcome of the euro, it would appear to defy all logic and mathematics. The bottom line is if the prospectus landed on your desk would you buy into it and if so at what return. If you and others would not then it is printing money and currency debasement. Draghi's 'whatever it takes', aka printing

Paying a small price? You, apparently, have no clue how broke is southern Europe. We talking trillions, my friend. Break it up or it wil explode in another paneuropean war. Keep it would more likely lead to war few decades down the road, not breaking it up. Do it now, while there´s time left.

Steve,
It seems that sooner or later Germans will have to decide if they will change for Europe's sake and pay a small price or carry on and pay a heavy price down the road when EU breaks up and we have a lot of angry people. Its mind boggling how 72 years after end of WW2, the German issue keeps on returning as the front and center. Stuff like this is making me slowly come around to an idea that maybe those Brexiters might have been unto something.

As other comments indicate, this comment is utopian--and I see now plausible reason for Germany to change, politically or even economically.

But more basically the big problem in EU is that its intent and result has been de-democratization: take power away from democratically elected bodies, which only exist at the national level, and transfer it to European level bankers and to finance ministers. That simply is not only to fly.

Do you think the wealthy nations are going to give one person-one vote to the eastern and southern periphery in a parliament that decides on social welfare measures?

Trump seems on the right path. The US must have a geopolitical foreign policy that deals with those in power--and the Mideast and many other countries are at too early a stage of development for stable democracies. We must end 14 years of totally unnecessary war that has produced a flood of refugees and destabilized Europe.

The really unnerving question is how long the longest recovery likely to continue? What will happen at the time of another economic shock? s Profits were up `14% in

Saving eurozone is Mission Impossible whether Germany agrees with transfers or not. The productivity gap between North and South (and East) is too big to be closed in any politically acceptable time.

Instead of cherishing an utopian dream, respected economists, like Dani Rodrik, should be working on plans how to break it up with as little damage as possible.

Im very pessimistic about immediate future of Europe (10-15yrs), and sadly enough, my country made a foolish decision to become a eurozone member, too. Dont hold my savings in euros, you shouldnt either.

Macron's proposal to lower corporate tax rates is unlikely to be effective, because it is based on the premise that French firms do not invest because they lack the funds to do so. That is unlikely in todays' low-interest environment.

The American investor Warren Buffett is quoted as saying, "I can't recall sending anything out to our managers saying, 'Let's do this because the tax law is going to change.'"

The true source of the reluctance to invest, as the author suggests, lies elsewhere, in the lack of aggregate demand in the French economy.

The most effective way to increase demand in the French economy is to reflate the German economy, which has built up stupendous trade surpluses by repressing domestic household consumption and refraining from investing in infrastructure.

Reversing these policies will, of course, depend on gaining German cooperation. Merkel has her work cut out for her. Failure is not an option.

This article is like D. Cameron Deja Vue! The author must ask any mechanic regarding the German Machine and he will get the same answer, it is either the German Way or the German Way. Merkel already snubbed Macron and told him to sort out his own backyard. If Macron activates his pledges at making people redundant, he will have everyone at his throat starting from ISIS, to the Unions, to the German and other countries since these people that shall be made redundant can only move North, the South is already Bankrupt, the German Machine has been there before them. And Macron is yesterday's Europe, he is only "Cliches" and there is no way on earth the establishments of the left and right are going to let him eat into their popular base. Interesting times ahead. Poor chap....

So Macron has to sort out Germany as well as France with no existing political base in power. Germany has to be desperate before that happens. So just how desperate is Germany. Not a lot I suspect. If it was a war game and I was passed Germany's situation to play I would say lets just wait, money still coming in.

Sh, Agreed. I see arrogance and complacence in Germany, not a desire for massive reforms / changes. Germany can be adaptable, but only faced with a dire crisis. Merkel thinks the status quo is working. Le Pen said that either she or Merkel would rule France. The French people choose Merkel.

NUR UBER MEINE LEICHE
Unless Macron Mandate believes it can attempt another Revolt.
After the Greek revolt over Austerity @ Europe.
After the British revolt over Migration @ Europe.
Now the German revolt over Transfers @ Europe.
Then the NATO/American revolt over Security @ Europe.
Merkel and MartinSchulze together : NUR UBER MEINE LEICHE.
Braveheart Macron - Even Napoleon III was spared such advice.

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